The Relationship between Price and Quantity demanded

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The Relationship between Price and Quantity demanded

1. A market is simply a place or an area where buyers and sellers of products contact one another and set prices. These may be international, national or local. Famous examples of markets include The Stock Exchange in London where stocks and shares are sold or Hatton Garden, also in London, which is the market for precious stones. 2. If a product is perishable or bulky, and therefore costly to transport, the market is likely to be a local one. Many markets, however, have no single location and much business is conducted worldwide, twenty-four hours a day, through telephone, fax and computers. 3. All sorts of goods and services are exchanged in this markets, where forces of supply and demand interact to establish their prices. 4. The demand for a product is the amount that people are able and willing to buy in the market over a certain time period at the prevailing price. Any assessment of the demand for goods or services must:• Refer to the effective demand — that is, the quantity which consumers can actually afford, not the quantity they would like to buy. • Relate to a certain time period — a week, month or year are typical examples. o Relate to a certain price level per unit. 5. A number of factors influence the quantity of goods or services which are demanded, the most notable of which is the price of the goods or services in question. As the price rises then the quantity demanded in each time period will fall (assuming nothing else changes). You should be able to relate this to your own circumstances. How will your purchases of certain brand of clothes alter as their price rises? Industry faces the same situation: rise in wages makes labour more expensive within the organization and may result in less labour being employed. Perhaps firms may use more machinery in place of labour. 6. Besides the price, a number of other factors also influence the demand for a product. Collectively these are known as the conditions of demand. These conditions include the following:a) Tastes and fashions 7. Choice is important in a free-market society. Taste will determine the choice of a consumer and this will, in turn, affect demand. However, our tastes tend to change over time as fashions begin to play a role. This is particularly true of certain products — for example, clothes and popular music. Our tastes are also influenced by advertising and the introduction of new products. b) Other prices 8. The amount of goods or services that are demanded depends upon the state of other goods and services. For instance, the increasing popularity of foreign holidays in recent years has led to rising demand for products associated with such holidays — for example, maps of other nations, sun tan lotion and foreign language tapes and phrase books. Goods and services which are purchased jointly in this way are called complementary goods. c) Real incomes 9. Real income is income adjusted for inflation. The level of real income can also affect demand for goods and services — though some goods are more sensitive than others to changes in income. 10. When people's income rises in real terms, they do not tend to spend their extra income on essential products; instead they look for new, and often more luxurious goods and services to purchase. d) Government policies 11. The government can have i huge impact upon business. Certainly, it can significantly influence the demand for goods and services.